TIME EUROPE
November 27, 2000, Vol. 156 No. 22
TIME FINANCE
Speak No Evil
E.C.B. president Wim Duisenberg has taken the rap for a weak euro. That's not entirely fair
By JAMES GRAFF Brussels
Two days before European Central Bank president Wim Duisenberg was to speak at a gala dinner marking the 10th anniversary of the Amsterdam Institute of Finance earlier this month, the event's organizers were taken aback by a firmly worded e-mail from his office announcing an important schedule change: the president would not be taking questions from the audience. Duisenberg limited his utterances to a careful speech in which he did not even mention the euro's weak point: its anemic exchange rate, down more than 25% against the dollar since its launch on Jan. 1, 1999.
His reticence was understandable. In a now notorious October interview with the Times of London, Duisenberg had indicated that the E.C.B. would not intervene to support the euro if war broke out in the Middle East. Currency markets divined in that a general weakening in the bank's will to uphold the euro's value, and traders sold off the currency with gusto, resulting in a further drop in its value against the dollar to an all-time low of $0.8328. As French and Italian politicians openly voiced their outrage, the E.C.B. was forced into the ignominious position of having to dismiss as "absolute nonsense" rumors that Duisenberg was about to resign.
The E.C.B. president appears determined to hold to his rueful promise in the wake of that interview to stop talking about intervention altogether. That can only be salutory. But larger forces than mere ill-chosen words are at work in pushing the euro down. Once the words stop — and the E.C.B. gets a surer feel for the mechanics of intervention and money supply — perhaps the bigger story will get higher billing: the euro is in large part a victim of its own success. It has allowed scores of European companies not only to assess more accurately their own value and that of their competitors elsewhere in Europe, but also to embark on global ventures that would have been much harder to finance in Spanish pesetas, Austrian schillings or Belgian francs. By jump-starting the creation of Europe-wide bond and equity markets, it has helped fund an unprecedented flow of European capital to the United States.
In the 18 months following the January 1999 launch of the euro, the net outflow of capital from Euroland to the U.S. amounted to $253 billion — more than double the amount of the previous 18 months. That massive flow of European investment to the U.S. amounts to 4% of the region's gross domestic product. It is possible that even a perfectly controlled E.C.B., headed by a Delphic master the likes of Federal Reserve chairman Alan Greenspan, would be hard pressed to uphold the euro's value in the face of that hemorrhage. If the situation were reversed and American investors were throwing money into the eurozone at that rate, that inflow would do a lot more to bolster the euro than any E.C.B. intervention on currency markets. For the fact is that capital's westward flow these days has little to do with the E.C.B. and a lot to do with economic policies of the member states.
As it is, the imperfect E.C.B. and its loquacious president serve as convenient scapegoats for European politicians who have yet to grasp the nettle and push through deeper reforms of their own economies. While the E.C.B. has damaged its cause by sending out conflicting messages, says Gary Dugan, global equity markets strategist with J.P. Morgan in London, it also has the misfortune of inhabiting "an environment where politicians have continued to push the 'self-destruct' button by keeping the rigidity in the labor market, which runs counter to anything helpful to the currency."
The eurozone also had the misfortune of being born in a period of miraculous growth in the U.S., creating an immensely appealing pull factor for European capital. "Of late it's been growth and earnings expectations which have been the main drivers of capital flows, and that's why so much Euroland capital has come to the U.S.," says Matthew Higgins, an international economist with Merrill Lynch in New York. "Growth — and corporate earnings expectations — have been stronger here."
Before the euro, it was much harder for European companies to drum up the capital to buy in the U.S. In 1999, European firms raised $100 billion on local bond markets, three or four times as much as the year before, according to J.P. Morgan vice president Alfonso Prat-Gay. Dutch consumer goods giant Unilever tapped the eurobond market for $7 billion in October to finance its acquisition of U.S.-based Bestfoods. "Improved conditions in the European bond market, thanks to the euro, have made such moves possible," says chairman Antony Burgmans. Dutch office product manufacturer Buhrmann financed its recent purchase of Colorado-based office supplies distributor Corporate Express with high-yield dollar bonds. But as Buhrmann chief financial officer Floris Waller says, "The growing eurobond market has improved the climate for all European corporate issuers." MORE>>
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COVER STORY
Long Wait
There are lessons to be learned by the candidates, the teams and the people as the process goes on and on
EUROPE
Back to the Ballot
Democratic elections show that nationalism is still a powerful force in this divided country
Great Pretender
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Mind Lab
From E-Europe: A Brussels firm helps science and business strike sparks
Welcome to the Content Metropolis
From Fast Forward Europe: How a venerable Hanseatic port shed its Old Economy image to become Germany's hottest city for digital media
MIDDLE EAST
Mubarak's Destiny
Despite some reforms, Egyptian election results warn the President of increasing voter discontent
AFRICA
Damage Control
South Africa's Thabo Mbeki moves to repair damage done by his comments on foreign and domestic issues
Nation Renovation
After years of violence, Somalia is rebuilding itself
TIME FINANCE
Speak No Evil
E.C.B. President Wim Duisenberg has unfairly taken the rap for a weak Euro
When Your Broker Is A Bookie
Something called spread betting is a new kind of investment strategy
Bourse Battles
Vienna's New Europe Exchange challenges Eastern Europe's budding stock markets
Made in Switzerland
Small companies — and savvy investors — are looking to quieter enclaves like SWX New Market for high-tech IPOs
BUSINESS
Not Yet Up to Scratch
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THE ARTS
Money in his Pockets
A new kind of producer is bringing Wall Street ways to London's theaterland
Wayward Sisters
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DEPARTMENTS
On Your Own Time
Hong Kong Havens: Where those in the know go to find calm and cuisine in Asia's busiest city
Worldwatch
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